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  1. #1
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    Default The 2008 property slump in NZ, will it be like the slump in the USA?

    Will it be the same at the USA, worse or will it be better?


    Similar to the USA I reckon, we have higher interest rates, our economy is slowing, we don't have a mining boom like Aussie to cushion us and are about 6-12 months behind the USA in economic happenings....hope I'm wrong.

    One strategy will shine through for any investor out there in 2008...PATIENCE! Don't be IMPETUOUS in 2008...


    Any thoughts from anyone else for 2008.
    Last edited by Commercial Dan; 31-12-2007 at 10:00 AM.

  2. #2
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    Default

    My understanding (based on what the media tell me and what I've learned here) is that the housing slump in the US is a re-setting of values after a feeding frenzy brought on by the availability of easy credit.

    The use of ARMs (Adjustable Rate Mortgages) that were sold with low 'teaser' rates (as low as 1 or 2&#37 to make them 'affordable'. The crunch came when those teaser rates reset to their 'real' rates, and the loan had increased to include the capitalised interest.

    Regardless of the increase in value of the home, the new repayments were no longer affordable, leading to the dumping of 1000s of homes on to the market at the same time.

    The mortgages, in the meantime, had been sliced and diced and on-sold to anyone and everyone, so that when a mortgage defaults, no one is sure what the effect is. This has meant that the holders of those sliced and diced loans have had to write down the value of the loans to what they consider (and seem to be constantly re-evaluating) the 'worst case' scenario - this is why huge $billion write-downs have been witnessed.

    Now that the market is nervous of such sliced and diced products (the phrase 'barge poles' comes to mind!), the mortgage issuer and funder no longer has anyone to share the risk with, so they have decided that the safest bet is to put their money in to something else, and not in to housing.

    The lack of new mortgage money means that developers are left with acres of built and semi-built houses that they can't shift, contributing to the overall level of stock available, but still with no buyers.

    What's in store for New Zealand?

    We haven't had the same culture of 'teaser' rates being aggressively sold to every Tom, Dick and Harriet that can't afford them, so we haven't got the same 'sub-prime' time bomb. However interest rates have increased significantly which will mean that some people can no longer afford the mortgage that they have, so an increase in forced sales may be evident.

    The bigger question is the availability of Mortgage money - I've seen one report on PT of someone being refused a new fixed term loan, but generally there doesn't seem to be a tightening of eligibility criteria for mortgages being reported (maybe one of the brokers on PT can comment).

    If mortgages do become harder to come by, then buyers will disappear from all sections of the market. Vendors may choose to not put their houses on the market in the face of such weakness, leading to prices (as reported by REINZ etc.) being maintained in the face of fewer buyers and sellers.

    However, this results in a pressure cooker of people who wouldn't mind selling, but don't want to 'yet' - gradually, these people will get bored waiting, or have a change of circumstance that forces sale. So, the longer the 'reduced volumes, prices stable' message goes on, the more pressure there will be, and when the slightest glimmer of hope appears, those vendors will come out of the woodwork, and 'flood' the market, leading to a 'surprising' decline in prices just when the commentators were predicting a 'soft landing' had been acheived.

    That's my 2c anyway.

    cube
    DFTBA

  3. #3
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    Default

    I think it will be more like the UK market than the US market, which I don't know whether that is good or bad. I particularly don't like how banks here are now trying to steer very well clear of buy to let mortgages, which might indicate a coming credit crunch in NZ in particular for investors.

    Cheers
    David

  4. #4
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    Default Can it be worse than the USA?

    From a BBC article City of debt shows US housing woe

    No-one knows how big the losses from investments based on American mortgages will eventually prove to be - estimates now range from $200bn upwards.

    The problem now facing many of the biggest lenders is that when losses appear on banks' balance sheets, the regulator's 10:1 rule comes back into play because losses reduce a banks' shareholder capital.

    Professor Roubini says that even at the low end of the estimates the potential impact on the rest of the economy is massive.

    "If you have a $200bn loss, that reduced your capital by $200bn, you have to reduce your lending by 10 times as much," he explains.

    "So you could have a reduction of total credit to the economy of two trillion dollars".

    The professor predicts that a reduction of credit on that scale will trigger a recession in America which could become global as the contagion spreads through the banking system worldwide.
    DFTBA

  5. #5
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    Default

    Yeah I think we'll be more like the UK than the US too. Things have been ridiculous in the US for some time.

    House prices have increased here a lot. A lot faster than incomes. And they're overvalued in my opinion. And so there's plenty of people borrowed up to the eyeballs, but in the US they borrowed much more heavily than that.

    I too reckon that there'll be an increase in forced sales. And there'll be a general weakening of prices. The situation in the US definitively shows that house prices don't always go up. This is the first time they've fallen in the US since the Depression as far as I know.

    I'm also half expecting another increase to the OCR here. With both of the 2 main parties offering tax cuts and both parties very very keen to have the power of office, there'll be all sorts of other handouts too. Petrol and food are both rising quickly and there's no immediate end to that.

    So I reckon we're in for a much slower time but not anything like the '87 crash or the US slump.

    Caveat: If the Chinese or Indian (or both) economies tank then it'll be hell to pay for one and all. The Chinese stockmarket has gone up heaps in a very short time. People borrowing to gamble in the market and all that stuff. Looks like a possible problem to me.

    David

  6. #6
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    Default

    Quote Originally Posted by Davo36 View Post
    Caveat: If the Chinese or Indian (or both) economies tank then it'll be hell to pay for one and all. The Chinese stockmarket has gone up heaps in a very short time. People borrowing to gamble in the market and all that stuff. Looks like a possible problem to me.
    Working with people in public health I'm actually more worried about the potential impact of another pandemic, bird flu or otherwise, we are seriously overdue on historical terms. The conservative pundits estimate 10% of the world population dead before any vaccine could be produced the less conservative estimate 25%. I lean towards the less conservative side myself, simply because with transplantation and HIV we now have a lot more immuno-compromised people in the world. In a pandemic, the victims are vectors for spreading disease, and this is a new route for disease to be spread. Either way that would be a major impact on the world economy.

    Cheers
    David

  7. #7
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    Jan 2005
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    Default

    Quote Originally Posted by Commercial Dan View Post
    Will it be the same at the USA, worse or will it be better?


    Any thoughts from anyone else for 2008.
    From my brief reading of the USA situation:
    Temporary/short term 2%(?) loans were made to people with a poor credit history. When the term expired the loan went to market rate. The borrowers then defaulted.

    This hasn't happened in NZ. I don't see why NZ would have slump during 2008.

  8. #8
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    Jun 2005
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    Nelson NZ
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    Default

    Well my goodness it is the new year and the sun is shining and the world is still turning.
    You are all correct. Every countries system and conditions are different.
    But the world banking system is linked.
    Regardless of how linked it is every market has the micro and macro impacting on it.
    In my little city I know that the rental demand is always fragile. So much so that one bus load of people to enter or leave the city in net numbers will flow on downward for a while.
    Recently we have been getting a constant inflow of Burmese refugees. Yesterday I housed the last of the most recent batch. This has placed significant pressure on the middle bottom of the market.
    So as soon as say the tenant market colapses because say the refugee supply dries up then in our micro market things will look bad.
    In the macro market we are dependent on interest rates that are set nationally. These are influenced by the world. Things look to me as if they are headed upward. My take is this will push more owner occupiers back and more investors away.
    So I think we will be seeing downward selling prices excellerated in cities with poor tenant demand.
    We will see upward pressure on rent levels in most cities that are not loosing people to Australia.

  9. #9
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    Aug 2006
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    413

    Default Castles Not Commodities

    The wheels did not come off Wall St and their investment exotica when they securitized, sliced, derivatized, hedged and conduited mortgages 4x. That was principal, interest, long and short risk. The worlds banks bought this junk as everyone thought is was truly underwritten by real assets. Nothing could have been further from the truth.

    Residential real estate are not commodities. The literal residential real estate asset trades in a very inefficient and friction filled market, hence the term non-traded assets. There are about $10 trillion worth of loans in the US against $14 trillion dollars worth of equity. Less than $300 billion is in question.

    94.4% of all mortgages are current and less than .075% of all housing stock is in foreclosure as of Dec 6th 2008 per the US Mortgage Bankers Association. This is less than a rounding error.

    Then there is the error of "the national market." There is no such thing as a national market despite what Case/Shiller, RealtyTrac et al. claim. Their data is filled with holes. Then there are 50 states, 62 cities over a million people and hundreds of neighborhoods per city.

    The credit availability melt down is media event. (See our Jan 08 cover story from Personal Real Estate Investor Magazine - "America - You are being misled!") It explains how the foreclosure story is massively overblown.

    There is some logic behind the attendant uncertainty. There has been significant overbuilding, bad loans made (but only .8625 of a $10 trillion dollar mortgage pool -Dec 6th 2008 Mortgage Bankers Assn) and a ton "investors in fashion." This latter group were often badly advised lambs to the slaughter who speculated with money they could not afford to and often held no reserves. A mortgage must be paid in good times or bad.

    So before the rest of the world slams the US system understand we expanded home ownership by a full four points over the last 7 years. Much of this was underwritten by foreigh banks and investment funds. US bankers got the money and these banks got "goose eggs." Notice they "wrote off" the investments as they couldn't value it as it could not be traded. Those US banks who are holding this paper wrote it down. Latest trades have been 27 cents in the dollar on book assets that technically have no value. Watch for a resurgence in bank performance as these assets come back to life........

    Accounting prestidigitation!

    Unfortunately when you look at NZ, Aus or UK and understand the lack of statistical depth in those economies, you see there are steep and violent economic declines affecting those that are exposed worst. They are short in duration as opposed to the US which are longer and shallower. (Expected 6% average decline in 2007 "national property values.") These markets serve as lessons for US, not the other way around. Note the bad news is being reported around transaction volumes not values. This effects home builders and real estate agents.

    I would predict NZ is in for a short rocky ride that will effect speculators, educators and anyone that is shackled to cashflow. Twelve to 18 months from now, stability will return as will historic appreciation averages.

    NZ, AUS and UK and US maintained price stability in desirable and recession proof neighborhoods while marginal and entry level homes and neighborhoods are taking a beating. They were the last sold, at the highest relative prices on the shakiest paper. These properties were never bargains but they were available ,and that is typically what newbie investors were advised to buy or "tipped into."

    Investors and particularly speculators are NOT the mainstream market and illicit zero sympathy from lenders and regulators. That segment is going to get ugly.

    Andrew Waite
    Personal Real Estate Investor Magazine
    Last edited by Weasel Driver; 01-01-2008 at 08:21 AM.

  10. #10
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    Default Get used to stories like this in 2008

    Multimillion-dollar debt left by company director

    The Press | Tuesday, 01 January 2008



    A company director has left New Zealand, leaving a trail of failed companies and millions of dollars in debts.

    Neil Gurdjieff Dougan was a director of companies developing luxury lodges in Hanmer Springs and Kaikoura and a 30-apartment building in Christchurch.
    The liquidators of 2 Design Ltd, of which Dougan is the sole director, said in its first report it had been advised Dougan was living in London and was unlikely to return to New Zealand.
    Wayne Deuchrass and Iain Nellies, of Insolvency Management Ltd, said they had been unable to contact Dougan and could not get any records of 2 Design Ltd, which owes $63,714 to Inland Revenue.
    They said the company was set up to provide architectural services for project development work and was involved with the construction of Te Kaikoura Lodge, in Kaikoura. Dougan and Ross Thomson, of Christchurch, were directors of the company.
    Te Kaikoura Lodge went into receivership in October and liquidation in November, along with Alpine Pacific Developments. Reports on any debts are not available for the lodge, which opened in October 2006.
    Dougan and Thomson were also directors of Braemar Lodge 2004, which went into receivership in July last year without opening its doors.
    The receivers of the Hanmer Springs lodge, Michael Stiassny and Brendon Gibson, of Ferrier Hodgson, estimated the company owed the ANZ National Bank $10.4 million.
    Dougan is sole director and shareholder of Warwick Mews Developments, also in receivership and liquidation.
    It was developing 30 apartments and owed $8.7m to Dominion Finance Group when it went into receivership in July.




    I think there will be only 5 or 6 finance companies left by the end of 2008, 'we are at the classic top of the cycle time' according to Seph Glu the former Chase director, 'we are at about 1986 compared to the last crash' he said.

    It will be a tough 2008 for some!


 

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